Late Editions Ltd v Revenue & Customs Commissioners (TC00128) (2009)

Summary

It was appropriate to refuse a claim for input tax where the taxpayer was involved in a chain of supply which included fraudulent defaulters and where it must have or should have known that the transactions were fraudulent, regardless of whether the taxpayer knew the identity of the defaulters.

Facts

The appellant (L) appealed against a decision of Her Majesty's Revenue and Customs refusing its claim for input tax. L traded in mobile telephones and had been warned of the problem of missing trade intra-Community fraud in that sector by Customs. Eight consignments of mobile telephones were supplied by a company to L through chains of supply leading back to three defaulting traders (C, B and W). L then sold the goods to traders in the EC. The company sourced the goods that L wanted. Those goods were situated in two warehouses and had passed through three traders following sale by C, B or W on the same day and in the same quantity as L's order. There were invoices and bank transfers matching those invoices for every transaction in the chains. L carried out limited checks on the goods and the suppliers. L's case was that the goods were sourced to meet the needs of its customers. It was alleged that C, B and W had failed to pay the output tax on goods in the supply chains. C had not made a VAT return on some of the supplies, B had not declared output tax on some of the supplies and W made supplies which were declared on its VAT return but on which the output tax was largely offset by input tax, part of which was disallowed. C and B had been warned of fraud in the sector. A large amount of the evidence given by Customs regarding the defaulting companies was hearsay. L's claim for input tax on the transactions was refused on the basis that each chain involved the fraudulent evasion of VAT and L knew or ought to have known that. L submitted that (1) Customs had not established that there were defaulters or tax losses in the chains, L did adequate due diligence and it could verify the entire chains; (2) there was insufficient proximity between it and the alleged defaulters, and Customs could not avoid the statutory deduction provision.

Held

(1) The tribunal had to decide whether there was a VAT loss and, if so, whether that resulted from a fraudulent evasion. If it did, the tribunal had to decide whether L's transactions were connected with that evasion and, if so, whether L knew or should have known that, Blue Sphere Global Ltd v Revenue and Customs Commissioners (2009) EWHC 1150 (Ch), (2009) BVC 580 applied. Many elements of L's conduct of business fell into place if the transactions were pre-arranged so that the only risk was that Customs would deny input tax. There was cogent evidence that C and B acted fraudulently in supplying goods to the chains and failing to account for output tax and that L was a knowing participant in the fraudulent transactions. The chains were designed to make it difficult for Customs to counteract the fraud. It was not necessary for L to have known the identity of the defaulters nor was it necessary to have evidence of how the profits from the fraudulent transactions were to be divided. If W made the supplies to the chains intending to cancel out the output tax by making a fraudulent input tax claim, and L knew of that, that was sufficiently connected to L's chain to entitle Customs to refuse its input tax claim. W sought to mask its other transactions purporting to offset its liability to account for output tax. Despite Customs' failure to adduce proper evidence directly relating to the disallowed input tax, the evidence of the chains leading from W was sufficiently cogent to show a fraudulent loss of tax. L must have or should have known that the purchases were connected with the fraudulent evasion of VAT. (2) It would have been extraordinary if a trader who was knowingly involved in a fraudulent chain could reclaim input tax on selling abroad provided that the immediate supplier was not the defaulting trader, Kittel v Belgium (C-439/04) (2008) STC 1537 ECJ (3rd Chamber) applied. The principles in Kittel did not depend on domestic legislation and the case did not establish that deduction could be refused if the national legislation so provided. It was necessary to write into the right to deduct input tax a qualification based on Kittel, Vodafone 2 v Revenue and Customs Commissioners (2009) EWCA Civ 446, (2009) STC 1480 applied.